How Narendra Modi’s demonetisation is weighing on sectors

November 29, 2016 — INDOLINK Consulting (es)

Source: The Economic Times, Nov 29, 2016

The government’s decision on November 8 to immediately ban Rs 500 and Rs 1,000 notes that account for 86% of all currency in circulation has impacted a raft of sectors. Consumers have turned frugal, causing a sharp drop in demand for goods and services. While farmers and small industries will bear the brunt and sectors like transport and real estate will visibly be in pain, several other industrial sectors will have to scale back services or production.

NUMBER GAME: In November, utility vehicles sales expected to be down 40-50%, commercial vehicle sales down by 50-60% and two-wheelers 20-40%

Sales of commercial vehicles, two wheelers and luxury cars are the worst hit by the demonetisation move. Carmakers are skimping on production to streamline inventory and have reduced dealer (wholesale) targets by up to 40%.

While footfalls at dealerships across the country have dropped by 50-60%, bookings have fallen equally by 50%. Gautam Modi, a Mumbai-based Audi dealer, says sales fell by more than 45% in November. Even rural markets, which account for nearly two-thirds of entry-level motorcycle sales in the country, are in pain because vehicle purchases are done by cash.

To offset the impact, manufacturers through dealers and finance companies have started offering lower interest rates and zero down payment to push sales. RC Bhargava, chairman of Maruti Suzuki, the country’s largest car maker, however sees this as a blip. The impact on small car sales may be minimal as most of the transactions occur through bank financing or loans. “We have advance bookings and the waiting period for several models which will help us tide through this phase.”

HOSPITALITY/TRAVEL: The trip can waitPOSITIVE IMPACT: Use of credit cards at national monuments, rise in digital payments

NUMBER GAME: Restaurant reservations in Delhi NCR dropped by 28%, in Mumbai by 7% and in Bengaluru by 2%

Demonetisation is weighing heavily on the tourism sector, already under stress due to the sharp escalation in pollution n India. The number of inbound tourists visiting national monuments have dropped significantly after the note ban. Almost all these places only accept cash, which leaves no option for these travellers, says Rajeev Kohli , Senior VP, Indian Association of Tour Operators.

“This ban has almost choked the tourism industry forcing many travellers to postpone or cancel travel,” he says. Airlines too are seeing a drop in bookings and occupancy and increase in cancellations. On Monday, SpiceJet CMD Ajay Singh told a business channel that there is a visible impact of demonetisation on airlines.

Popular tourist destinations of Indian travellers such as Thailand, Singapore, Malaysia, Maldives, Hawaii, Vietnam, Sri Lanka, Nepal, China, Indonesia and Dubai have all seen a drop in bookings. The currency ban has caused huge uncertainty and disrupted transactions for smaller hotels, restaurants and food and beverage operations, which accept cash. Restaurant reservations dropped the highest in Delhi NCR, followed by Mumbai and Bengaluru, according to an EazyDiner report.

FMCG: Demand intact, but where is the money?POSITIVE IMPACT: Pending dues fl owing in from wholesalers (using old currencies)

NEGATIVE IMPACT: Rural buying power reduced

NUMBER GAME: 35–40% drop in sales expected in the interim

FMCG companies are already staring at a 20– 30% fall in sales post the note ban — and much of it is coming from rural India. Rural markets account for 40– 45% of revenue for all major FMCG/retailfocused companies.

While most analysts expect sales of essential items like soap and toothpastes to continue unhindered, categories like body cream, special body oils, deodorants, high-end shampoos, snacks and fries, chocolates, special enriched food items and ice-creams may log lower sales in the interim.

“There’s demand for these products, but people do not have enough liquidity (money) to buy them,” says Abneesh Roy, senior VP & FMCG-retail analyst at Edelweiss Securities.

“People mostly use cash in rural India; they don’t use cards like the way people in cities do. Since most FMCG companies have a large rural portfolio, we may see some dip in their earnings over the next two-three quarters.” Most equity analysts, whom ET consulted, expect FMCG sales to drop 35 – 40% over the next two quarters. The only silver lining being the fact that many FMCG companies have managed to collect “pending pay-ins” (collection dues) from powerful wholesalers in old Rs 500 and Rs 1,000 notes.

BANKS–NBFCs: No time for money-spinners at this ratePOSITIVE IMPACT: Increase in CASA deposits for most banks; lending rates to drop further

NUMBER GAME: Banks have received deposits in excess of Rs 6 trillion since the note ban

The government’s demonetisation drive may puncture the earnings of most banks this quarter. With most staffers handling the Rs 500 and Rs 1000 note deposits, exchange and withdrawals, “revenue-yielding” operations such as vending loans and cross-selling investment products have taken a backseat in most banks.

“The earnings of banks may take a hit in the third and fourth quarter,” says Siddharth Purohit, senior banking analyst at Angel Broking, a retail stock brokerage. “We may not see loan book growth as most banks are busy facilitating the demonetisation process. They’re not aggressively selling a lot of credit products now. That apart, the SME and real estate sectors, to which most banks lend a significant part of their book – are in a state of lull.”

Demonetisation will help most banks improve their CASA (current account, saving account) deposit counters, albeit not many analysts expect this money to remain in the bank for long. Flushed with cash, most banks would now be forced to cut rates – on both deposits and lending – over the next few weeks. This, in turn, may spur credit offtake in the banking sector – towards the first quarter of next fiscal.

NBFCs and microfinance institutions (MFIs) are under severe stress as their collection cycles (mostly in cash) have gone awry post November 8. Most NBFCs and MFIs have announced ‘collection holidays’ till such time there’s sufficient money in the system.

E-COMMERCE: Fewer clicksPOSITIVE IMPACT: Good for unit economics as Cash on Delivery down and returns drop

NEGATIVE IMPACT: All companies hit; niche players worse off

NUMBERS GAME: Sales down 60-70%

Of the 1 million items shipped daily from e-commerce companies, 60% are on cash-ondelivery (CoD). “These are not getting placed. Suddenly priority for shopping is low,” says Sreedhar Prasad, partner, ecommerce and startups, KPMG India.

While sellers say their business is down in the dumps, e-commerce companies are playing down the post-demonetisation impact. “Customers are adopting electronic payments at delivery and this has seen 10X growth,” says an Amazon India spokesperson.

Snapdeal says its digital wallet Freecharge has helped. A day after the decision to ban Rs 500 and Rs 1,000 notes, e-commerce companies capped CoD orders to below Rs 1,000 with all purchases above this amount to be carried out by digital wallets or cards.

Sellers have a dif ferent view. Deepak Chopra, founder of Softek Surya, a seller based in Nehru Place, Delhi, says daily shipments to portals are down to 700 from 4,000. “I have 60 employees and monthly costs of Rs 20 lakh. My sales have dropped to less than Rs 5 lakh. How will I pay them?” Hyderabad based seller Redlily and Jaipur based jewellery brand Dhora have also seen sharp decline in online sales.

The worse hit among e-commerce companies are the niche sellers— selling a single category like lingerie, eyewear, fashion— whose sales have dropped 60-70%. “People are buying only essentials. Besides, the large companies are equipping their logistics staff with card readers to ease payments in delivery. Smaller companies can’t afford that,” says Prasad of KPMG.

NEGATIVE IMPACT: Layoffs in short term; Could take longer to stabilise as buyers wait for impact of GST & any budget proposals as well

NUMBER GAME: Overall market drops by 50-60%

The luxury goods market already reeling under the impact of global and local issues — from weak outlook to mandatory PAN requirement for purchases topping Rs 2 lakh — got another hard knock due to demonetisation. The exception was the window between 8 pm and the wee hours of November 9 when buyers flocked to pick up expensive perfumes, scarves, watches, jewellery, smartphones (mainly iPhones) with the discontinued currency notes.

“The immediate impact is severe,” says Anurag Mathur, partner and retail expert, PricewaterhouseCoopers (PwC) India. Rajat Wahi, partner and head of consumer markets, KPMG India, believes there could be layoffs and the pain could last for six months. “After two quarters, pent-up demand will push sales,” says Wahi.

Luxury buyers could also go into hiding as they wait for the implications of GST and budget proposals. “Some drop (in luxury sales) might be permanent even, as buyers wait to get clarity,” says Wahi.

GOLD: The shine is lost for nowPOSITIVE IMPACT: Gold prices may fall post December

Zaveri Bazaar, the famed gold market of Mumbai, registers business worth Rs 125 crore on an average day. Post the noteban, this has dropped to a mere Rs 13 crore worth of sales per day. “We don’t have buyers now… all that we get are people dealing in recycled gold and some minor wedding purchases,” says Kumar Jain, vice-chairman of the Mumbai Jewellers Association.

The jewellers of Zaveri Bazaar were hoping to make a killing this wedding season as some 29,000 marriages are slated to take place across India in November and December. To meet the demand head on, wholesale jewellers of Zaveri Bazaar had imported and stocked close to 70 tonnes of gold (as against their quarterly import average of 30 tonnes).

“Now we’re left with only stock and no buyers… People have even started rescheduling marriages – or holding simple ceremonies in courts and temples.” The demonetisation drive is expected to depress gold prices significantly. Currently trading at Rs 28,750 (per ten grams), gold prices are expected to drop below Rs 28,000 (per ten grams) post December.

Jewellers are also worried about tax raids as there are widespread reports of black money hoarders using gold to clean up their cash-in-hand (in the initial days of demonetisation).

NUMBER GAME: Average viewership dropped to just 55 people per show in the first week of demonetisation

Entertainment sector (mostly cinema houses) could be the first one to wriggle out of hardships caused by the demonetisation drive. After two weeks of “low business days”, things are looking up for most cinema houses as people have started using “plastic money” to get their weekly celluloid fix.

“Our card-based sales of tickets and food & beverages have doubled since the noteban,” says Siddharth Jain, director, INOX Leisure. “For the first two weeks, people didn’t have enough time to come and watch a movie as they were standing in bank queues… that period is behind us now.”

To increase footfalls, multiplex chains like Inox have set up POS machines on their premises to facilitate withdrawal of cash up to Rs 2,000 a card every day. That said, nearly a dozen studios (mostly regional banners) have delayed their film releases indefinitely, awaiting the return of cash in the patrons’ wallets.